How Google, Apple are Managing Their Cash Pile

Corporate treasurers at companies like Google are being forced by the Federal Reserve's low-rate policy to invest in ever-riskier credit products

NEW YORK: Corporate treasurers at companies like Google are being forced by the Federal Reserve's low-rate policy to invest in ever-riskier credit products, including longer-dated investment-grade bonds, junk bonds and leveraged loans, according to buyside and sell-side sources.

In an effort to get a return on their mountains of cash at hand, Google and others have purchased high-yield bonds and leveraged loans, while names like Microsoft and Apple are said to have dabbled in non-investment-grade securities.

"Many of the companies with the largest levels of cash on hand have bought high-yield bonds and one of the big areas of interest this year is leveraged loans," said a fund manager at one of the biggest US investment firms. "Some are also looking at emerging market local debt as a category," he said, although far fewer than those going down the credit spectrum and into non-investment-grade loans and bonds.

Google's treasurer, Brent Callinicos, could not comment because the company is in earnings blackout. Microsoft and Apple officials were not immediately available for comment.

It's understood, however, that Google, like other experienced corporate investors in the debt capital markets, has purchased non-investment-grade debt via external fund managers with specific expertise in the riskier asset class. The most often mooted are in the pharmaceutical and technology sectors, where companies throw off billions of excess cash a year, said sources.

Going into higher risk corporate bonds and loans is a new phenomenon for corporate treasurers, who have traditionally invested in the highest quality corporate bonds and in maturities typically no longer than three years.

But those bonds are now so tight in spread that many of the biggest institutional investors are underweighting single A and above rated corporates in their portfolios. At the same time, they are increasing their investments in lower rated, longer-dated and also more junior bonds in the capital structure to get yield.

The companies with hoards of cash on hand are facing the same investment dilemmas, and their cash keeps piling up every day as they stay away from major acquisitions.

"The anomaly here is that you have had Fed intervention that has created an artificially low Treasury curve and because corporate yields are at all-time tights and both investment-grade and high-yield bond spreads have had such a fantastic run in the last year, there are only so many places to go to get yield," said one portfolio manager.